Cryptocurrencies have generated a lot of debate because of their storage value and being used as an asset class. It is a borderline case where it is not illegal to hold cryptocurrencies, but there is a lot of anxiety that the Government is contemplating banning them. Reserve Bank of India has shown its reservation on the use of cryptocurrencies. The Supreme Court has not taken any position as such other than asking the Government to draft laws and make its stand clear on the regulatory side.
According to recent media reports, there are about 8 million investors in India, holding investments of $ 1.4 billion in various cryptocurrencies. Several exchanges across India deal in these currencies, facilitating trading, settlement, and promoting cryptocurrencies. The whole ecosystem is operating in an unregulated regime, neither being illegal with markets ripe with speculations that the Government is ready to ban them at any point of time in the near future. The investors and the intermediaries operate in an uncertain environment and live in anxiety, leading to hyper speculation.
The basic purpose of currencies/money is to facilitate transactions and help in exchange for value. But currently, cryptocurrencies are not being used as a medium of exchange or for facilitating transactions but are seen as an asset class having storage value. This is because of the regulatory gaps at present. Recent developments show that the time has come to fill up this gap as soon as possible.
In 2019, the Government came out with a bill banning cryptocurrencies, but the Bill did not see the light of the day and got lapsed, leading to further uncertainty and lack of clarity on the subject. The draft bill in 2019 banning cryptocurrencies recommended jail term up to 10 years and huge financial penalties on people who mine, generate, hold, sell, transfer, dispose of, issue or deal in cryptocurrencies.
RBI also came out with a circular on April 6, 2018, forbidding banks from entertaining customers having exposure and dealing in cryptocurrencies. This circular was quashed by Supreme Court in its judgement on Internet and Mobile Association of India verses RBI on March 4, 2020, citing, lack of legislation and laws on these currencies, noting that in the absence of any legislation, the RBI cannot impose disproportionate restrictions, like banning buying and selling of cryptocurrencies. The RBI then officially withdrew the said circular while cautioning banks to deal with any kind of exposure with these currencies.
Finance Minister Smt Nirmala Sitharaman when asked a question on the government stand on the status of crypto currencies, said that “I can only give you this clue that, we are not closing our minds, we are looking at ways in which experiments can happen in the digital world and cryptocurrencies”, she further added that, “there will be calibrated position taken”. The Government’s initial plan was to ban private crypto assets while promoting blockchain – a secure database technology that can revolutionise international transactions and are the backbone of virtual currencies.
Digital currencies across the world are making inroads into financial transactions because of their ease and secured nature. But global central banks, including RBI, vary illegal money getting into the system, with no central bank’s control on financial flows due to lack of one central entity and use of decentralised distributed ledger technology (DLT). The backbone of cryptocurrencies is the blockchain technologies with distributed ledger technology. The use of distributed ledger technology, which is efficient, secured and is less prone to frauds. The decentralised database leads to more and more disintermediation, which is cost-effective.
The draft cryptocurrencies and regulation of official digital currencies Bill, 2021 is on the cards. Everyone is expecting that this Bill will strike a balance between the adoption of breakthrough technology and transparency and financial stability
The benefits of digital transactions or digital currencies are immense. It has the potential to revolutionise the functionality of B2B, G2G and B2G and sectors as automobile, tourism, travel industry, banking and finance, real estate, supply chain and insurance etc.
The Government is making more and more use of this technology for property records management, financial transactions, issue of digital certificates, Digi locker facility, E-notary, electronic health record management, E-sign, E-praman, Aarogya Setu, Cowin app, public service delivery, seamless data exchange across departments, smart contract enabled workflow, authentication and verification of all transactions. Blockchain-based applications eliminate the requirement of the central entity and its secured peer-to-peer network, where transactions are validated considering the history of decentralised storage.
The Government has put in place a National Blockchain Strategy with the Ministry of Electronics and Information Technology (MEITY) as the nodal ministry, setting up a Centre of Excellence (COE) in blockchain technology. COE is focusing on collaborating amongst Government, public and private sectors. Other departments and institutions such as NITI Aayog, C-DAC, RBI, NASSCOM and National Information Centre (NIC). National Blockchain will host property chain, health chain, education chain, smart city chain, insurance chain etc.
Small businesses like MSME have many benefits from these technologies, with the establishment of financial history, production management, billing authentication and discounting TReADs, taxation of GST and Input tax credit, Government E-market (GEM) supply chain integration.
The Finance Minister, in a question pertaining to cryptocurrencies in a recent interview, has stated that we cannot and should not shut out technology, but it’s also not advisable to jump the gun when there still a lot of unresolved issues around cryptocurrencies are. She added that a lot of consultation took place; RBI’s views were also taken, now we have to formulate them and strike a balance. She cited the example of issues faced by El Salvadore that tried to adopt Bitcoin as legal tender.
The integration of Blockchain technology and digital currencies can revolutionise the business ecosystem in India. There is no doubt that these currencies are beneficial, but the question is the choice—private currencies or central bank-promoted digital currencies. Now the draft cryptocurrencies and regulation of official digital currencies Bill, 2021 is on the cards, and everyone is expecting that this Bill will strike a balance between the adoption of breakthrough technology and transparency and financial stability.